Tax Strategies for Entrepreneurs

When was the last time your CPA walked you through every legal tax strategy available to you? If you’re like most entrepreneurs, the answer is probably, “not often.” Most CPAs focus on compliance—getting your tax return prepared and filed correctly. The advice they often provide tends to revolve around standard options like, “save more in your SEP IRA” or “buy equipment at year-end for a quick deduction.” While these suggestions can help, they often only scratch the surface of what’s possible.

A wise man once told me: “It’s easier to negotiate a lower price than to spend time earning the money to pay a higher price.” This wisdom stuck with me, and it has saved me time and money over the years. When our firm began focusing on proactive tax planning, it hit me—this approach applies to taxes as well. It takes far less effort to explore and implement the tax strategies you qualify for than to earn extra money just to pay higher, unnecessary taxes.

As entrepreneurs, we face unique financial challenges, and there are substantial benefits to using long-term tax strategies to keep more of our hard-earned money. However, to take full advantage of these strategies, we need to move beyond the basics. Let’s clarify what tax strategy is not:

  • Offshore tax shelters: Illegal schemes that often come with high risks.
  • A product like life insurance or annuities: While these can offer some tax benefits, they are not comprehensive solutions.
  • Inflating expenses or engaging in aggressive tax schemes: These can attract unnecessary attention from the IRS and lead to audits.
  • Last-minute, year-end maneuvers like maxing out your IRA or buying equipment for a quick deduction: These short-term strategies have their place but aren’t enough to maximize your tax savings in the long term.

Instead, we need to look at tax strategies as part of a broader, long-term financial plan.

Real Tax Strategy: A Long-Term, Proactive Approach

True tax strategy is forward-looking and long-term. It’s much more than an annual scramble to max out your SEP IRA or rush to purchase some equipment for a quick deduction before the year ends. While many business owners take a short-term view, only focusing on immediate tax relief, they miss out on strategies that could save them much more over time. This is where proactive tax planning comes in.

Imagine tax planning like a game of chess. Rather than focusing on individual moves (like maximizing a retirement account contribution), a real tax strategy looks at the entire board. It plans multiple moves ahead, ensuring every action is part of a cohesive, forward-thinking plan.

Some strategies you can consider:

  • Entity Structuring: Are you using the right business structure? Sole proprietorships, LLCs, S-Corps, and C-Corps all come with different tax implications. In some cases, restructuring your business could reduce your tax burden significantly.
  • Income Shifting: Could you shift some of your income to family members who are in lower tax brackets, thereby reducing the overall amount of tax paid by your family unit?
  • Converting Ordinary Income into Capital Gains: Capital gains are often taxed at a lower rate than ordinary income. Can you convert some of your income streams to take advantage of this?
  • Medical Expense Reimbursement Plans (MERPs): Could you cover healthcare costs in a tax-efficient way, significantly reducing your taxable income?
  • Tax-free Business Sales: Can you structure your business to be sold with zero capital gains tax, taking advantage of strategies like Section 1202?

These strategies require thoughtful, forward-looking planning, but the potential savings can be enormous. They are not quick fixes but part of a comprehensive tax strategy that will benefit you over the long term.

Entrepreneurs Have a Unique Advantage

As a business owner, you have more control over how and when you get paid than the average employee. This gives you a unique advantage in managing your taxes. For example, you can decide how much salary to take and when, which allows you to control the amount and timing of your tax liabilities. This flexibility opens the door to a wide array of tax-saving strategies that employees simply don’t have access to.

However, many entrepreneurs aren’t taking full advantage of this opportunity. Why? The relationship with their CPA is often limited to compliance—filing accurate tax returns and meeting deadlines. While compliance is essential, it’s not enough to reduce your tax burden significantly.

Imagine how different your tax experience could be if your CPA was more like a financial strategist, helping you lower your tax liability in a legally sound way. Instead of just preparing your taxes, they would proactively advise you on how to structure your income, when to make certain purchases, and how to shift income into lower tax brackets.

Most entrepreneurs feel a sting every year when they write that check to the IRS, thinking about how hard they worked for that money. If this sounds familiar, it may be time to consider working with a tax strategy firm that specializes in lowering your tax bill, not just filing your return.

The Tax Code: A Roadmap to Paying Less

The U.S. tax code is massive and complex, with over 75,000 pages of regulations, guidance, and rules. While this might seem overwhelming, it’s important to remember that only about 15% of the tax code focuses on what you must pay. The other 85% is a guide to how you can legally reduce your tax burden. Think of it as a roadmap. Instead of focusing solely on what you owe, consider how the tax code can be used to pay less.

Big corporations and wealthy individuals understand this well. They don’t stop at the first 15%. Instead, they dig deep into the remaining 85% to find strategies that allow them to minimize their tax liabilities. This is where tax strategy firms come into play, helping businesses and high-net-worth individuals take full advantage of the opportunities in the tax code.

For example, consider Salesforce. Over the last three years, the company earned $4.2 billion. Not only did they pay zero dollars in taxes, but they also received a $4 million refund. Salesforce’s ability to leverage the tax code in this way comes from understanding the rules deeply and using them to its advantage. The same opportunities are available to you as an entrepreneur—you just need to know where to look.

Our Tax Strategy Process: 4 Steps to Saving More

At our firm, we use a structured, four-step process to uncover and implement tax-saving strategies for our clients. This process helps entrepreneurs go beyond the basics and take full advantage of the opportunities the tax code provides.

  1. Understand Your Situation
    The first step is to understand your unique business and personal financial situation. Every entrepreneur’s circumstances are different, and the strategies that work for one business may not work for another. We take the time to get to know you, your business, and your financial goals, so we can tailor a tax strategy to your specific needs.
  2. Match Strategies to Your Situation
    Once we understand your situation, we match it to the available tax strategies. The U.S. tax code contains thousands of potential strategies, but not all will apply to your circumstances. We help you sift through the options to find the ones that will have the most significant impact on your tax bill.
  3. Cost/Benefit Analysis
    Implementing tax strategies takes time and effort, so it’s essential to focus on the strategies that will provide the most benefit. We perform a cost/benefit analysis to ensure that the strategies we recommend are worth the effort. Our goal is to help you save significant money without jumping through unnecessary hoops.
  4. Implement the Optimal Strategies
    Finally, we help you implement the strategies that make the most sense for your business. This could involve restructuring your entity, shifting income, or putting a plan in place for the coming tax years. The key is to act proactively, not reactively, so you can maximize your savings over the long term.

By following this process, you’ll be using the same strategies that successful entrepreneurs, business owners, and wealthy families have been using for decades. The result? You’ll be paying only your fair share of taxes—and not a dime more.

Example Tax Strategies to Lower Your Taxes

Here are some practical examples of tax strategies that entrepreneurs can use to reduce their tax burden:

1. Income Shifting

Income shifting is a powerful tax-saving strategy that involves moving income from a higher tax bracket to a lower one. One of the most effective ways to do this is by hiring your children to work in your business. According to IRS rules, hiring family members is allowed, and the income they earn is taxed at their rate, not yours.

In 2023, a child can earn up to $13,850 without paying any income taxes. The next $11,000 is taxed at just 10%. This means that by hiring your children, you can effectively shift income that would be taxed at your higher rate into their lower brackets.

This strategy is even more powerful when you consider the long-term benefits. For example, if your children contribute to a Roth IRA, they can begin building a tax-free retirement nest egg early in life, thanks to the income they earn from your business. And because Roth IRAs grow tax-free, the benefits compound over time.

2. Medical Expense Reimbursement Plans (MERPs)

Medical expenses can be a significant financial burden for many entrepreneurs, especially when they’re paying for health insurance out of pocket. While health insurance premiums can be deducted, many medical expenses don’t meet the threshold for tax deductibility.

A Medical Expense Reimbursement Plan (MERP) allows business owners to deduct a much broader range of medical expenses, reducing their taxable income. These expenses can include insurance premiums, co-pays, prescriptions, dental work, and even alternative treatments that might not be covered by traditional health insurance.

3. Section 1202: Qualified Small Business Stock

If you’re planning to sell your business, Section 1202 of the tax code offers an incredible opportunity to avoid paying capital gains taxes. This section allows for the exclusion of up to $10 million of gains from the sale of a qualifying small business, or 10 times your adjusted basis in the company, whichever is greater.

To qualify, the business must meet certain criteria, such as being a C-Corporation and having assets under $50 million. If your business qualifies, the potential savings are enormous. For entrepreneurs selling a successful company, the difference between paying capital gains taxes and excluding the gain can amount to millions of dollars.

Additional Advanced Tax Strategies

In addition to the strategies outlined above, there are several other advanced tax-saving techniques entrepreneurs can consider:

  • Research & Development (R&D) Tax Credit: If your business engages in research and development activities, you could be eligible for the R&D tax credit. This credit applies to costs related to developing new products, processes, or services and can reduce your tax liability significantly.
  • Cost Segregation: This strategy allows real estate owners to accelerate depreciation on certain building components, resulting in larger deductions in the early years of ownership. By breaking down a building’s components—such as electrical systems, plumbing, and finishes—you can deduct these assets at a faster rate than standard depreciation allows.
  • Retirement Plan Optimization: Many entrepreneurs use traditional retirement plans like SEP IRAs or SIMPLE IRAs, but there may be more tax-efficient options available. A cash balance pension plan, for example, allows business owners to contribute significantly higher amounts than traditional plans, leading to more substantial tax deductions.

Conclusion: Start Playing Chess with Your Taxes

Taxes don’t have to be a painful, annual burden. By adopting a proactive, long-term tax strategy, you can ensure that you’re keeping more of your hard-earned money and growing your business with confidence. As entrepreneurs, the tax code provides us with numerous opportunities to reduce our tax liability legally. The question is: are you using them? It’s time to take control of your tax strategy and start playing chess—not checkers—with your finances.